D 1 D 2 P QD 1 QD 2 Change in Income [Normal-Direct; Inferior-Inverse] More income results in more demand for new cars; less demand for used cars. New Cars Used Cars Less income results in more demand for used cars; less demand for new cars.
Rise in prices of one good lead to a contraction in the quantity of the good demanded & increase in the demand for its substitutes
Changes in the price of complements
Goods that are consumed together. When demand for one good rises, so does demand for the other.
D 1 D 2 P QD 1 QD 2 "Change in Taste" [Direct] An increase in taste for DVDs results in an increase in demand . A decrease in taste for videos results in a decrease in demand . D 3 QD 3
D 1 D 2 P QD 1 QD 2 Expectations [of consumers] [about future price, availibility, & income] iPhone $399 Buy it now to save money.
D 1 D 2 P QD 1 QD 2 Expectations [of consumers] [about future availibility of toilet tissue] If there is expected to be a major shortage of toilet tissue , then consumers will stock up now or risk not getting any.
D 1 D 2 P QD 1 QD 2 Expectations [of consumers] [about future income] Let’s say that we are coming out of recession & consumers feel secure about their jobs. [ Positive future income ]
D 1 D 2 P QD 1 QD 2 Expectations [of consumers] [about future income] Let’s say that we are going into a recession and consumers don’t feel secure about their jobs. [ Negative future income ]
D 1 D 2 P QD 1 QD 2 Change in Market Size [Direct] [Number of Consumers] More demand for both normal & inferior goods New Cars Used Cars
$20 $15 $10 $5 10 20 30 40 A B A change in price causes a change in the quantity demanded D P Q 50
When something changes other than price, what happens?
The whole curve shifts,there is a change in demand
Change in Quantity Demanded vs. Change in Demand Change in quantity demanded Change in demand
Refer to a movement along a given demand curve
As a result of a change in the commodity price (price of the good itself whereas other factors influencing demand remains unchanged)
Refer to a shift in the demand curve (left / right)
As a result of a change in the economics variable and not the price of the good itself
A Change in Demand Versus a Change in Quantity Demanded To summarize : Change in price of a good or service leads to Change in quantity demanded ( Movement along the curve ). Change in income, preferences, or prices of other goods or services leads to Change in demand ( Shift of curve ).
lower income group elastic dd (sensitive to price changes)
habits inelastic dd.
Eg: demand for cigarette by smokers.
Relationship between price elasticity of demand and total revenue (TR)
Important for producers to decide whether they should increase, decrease or maintain the price of the good they sold in the market to enable them to maximize their profit
TR = price x quantity
TR increases or decreases when there is price changes depend on the price elasticity of demand.
i. If demand is elastic, to increase TR, price should be decreased.
ii. If demand is inelastic, to increase TR, price should be increased.
iii. If demand is unitary elastic, change in price would not affect and change in TR.
(i) Inelastic demand (Ed<1) Assume price increases from RM10 to RM15 Price (RM) Quantity (units) 8 10 10 15 Steep line demand curve TR before = RM10 x 10 = RM100 TR after = RM15 x 8 = RM120 (TR increases) # If demand is inelastic, an increase in price will lead to an increase total revenue & vice versa
ii) Elastic demand (Ed>1) Assume that price increases from Rm10 to RM11 Smooth line demand curve P Q 7 10 10 11 TR before = RM10 x 10 = RM100 TR after = RM11 x 7 = RM77 (TR decreases) # If demand is elastic, an increase in price will lead to a decrease in total revenue.
iii) Unitary elastic demand (Ed=1) Assume that price increases from RM10 to RM20 20 10 10 20 P Q TR before = RM10 x 20 = RM200 TR after = RM20 x 10 = RM200 (TR remains the same) # If demand is unitary elastic, an increase in price will make total revenue remains the same Hyperbola line dd curve
The R/ship between TR & Price Elasticity of Demand when Price Increases Elasticity Coefficient Price Elasticity of Demand Price Quantity Demanded Total Revenue Ed>1 Elastic Increases Decreases more than proportionate Decreases Ed=1 Unitary elastic Increases Decreases in exact proportion Remain the same Ed<1 Inelastic Increases Decreases less than proportionate Increases
The R/ship between TR & Price Elasticity of Demand when Price Decreases Elasticity Coefficient Price Elasticity of Demand Price Quantity Demanded Total Revenue Ed>1 Elastic Decreases Increases more than proportionate Increases Ed=1 Unitary elastic Decreases Increases in exact proportion Remain the same Ed<1 Inelastic Decreases Increases less than proportionate Decreases